Direct vs. Indirect Corporate Political Activity: Political Contributions and Government Financing

Abstract

Prior research offers mixed empirical evidence on the performance benefits of corporate political activity (CPA). We offer a mechanism that can partially explain and disentangle these mixed findings— specifically, the reputational concerns of the political targets of such activity. Focusing on the particular context of campaign contributions to politicians, we argue that the efficacy of political contributions (from the perspective of the donating firm) can be explained by both the willingness and ability of the recipient political candidate to engage in quid pro quo actions benefiting the donating firm. Heterogeneity in willingness arises from the threat to the recipient of misconduct perceptions that can arise due to third- party monitors, while heterogeneity in ability arises from the position of the political recipient in networks of influence in decision-making or governing bodies that control resources of value to the focal donating firm. Taken together, our arguments highlight the varying implications of direct versus indirect channels of political influence. In particular, indirect channels, which are more opaque, can be more effective. We test our arguments in the context of the Small Business Innovation Research (SBIR) program, a government-run program in the U.S. that provides early-stage financing to start-ups in the form of financial grants.